The focus will now be on the capital markets & the economy in longer
trm perspective...I have wanted to do this for a long while and have
wearied of outlining near term perspectives...Short term opinion has
become an overcrowded field...

About Me

Retired chief investment officer and former NYSE firm
partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader,
and CIO who has superb track
record with multi $billion
equities and fixed income
portfolios. Advanced degrees,
CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms:
CAVEAT EMPTOR IN SPADES !!!

Wednesday, May 26, 2010

Early last autumn, when I turned more cautious on the market, itwas on an astoundingly strong trajectory. Even after the Jan. ' 10break, it was still on a trajectory that would have taken the SP 500to new record highs by year's end. Not impossible, but not a goodbet, either. So, yes, the rise in the market was too steep, but it waspartly understandable given the extraordinary rebound of corporateprofits.

My SP 500 Market Tracker currently projects the index to rise 25%from current levels to 1350 by year-end 2010 as 12 month net pershare surges higher. From a technical perspective, this would put themarket on a trajectory that is still extremely strong by price chartstandards, but the Tracker is merely assigning a moderate 16.5 p/eto earning power in excess of $80 per share.

Now, here is where it gets more tricky. S&P profits have exceededthose suggested by the sharp run ups in my leading indicator setsreflecting the deep cost cutting companies have undertaken. Sincethe bulk of the cost cutting is past, profit growth was bound tomoderate. Moreover, when measured on yr/yr % change, theweekly economic leading indicators have hit and have just crossedan inflection point, signaling that a slowing of profits growth is outahead. A significant slowdown in profits momentum is factored intothe $80+ per share projection for the "500". But, there is a problem.Once the leading indicators break the initial recovery signal surge,further upside momentum of the indicators is not only far moremild, it is more difficult to project with confidence. On top of that,the "fit" between the indicators and the profit trend loosens pastthe inflection point of the indicators, although it must be said thatprofits often do better than expected anyway.

The long and short of it is that with a sharp moderation in the trendof the leading indicators underway, the stock market could not holda nearly impossibly strong price trend and has corrected since a clearsignal has been sent that profits growth is going to slow. This isthe fundamental event I warned about last autumn, an event thatcame later than expected.

I am on the hook for expecting a solid year of economic and profitsrecovery in 2010 and for expecting a continuation of the cyclical bullmarket. Since earnings currently remain in a sharp upswing, Ithink the market has overshot to the downside by 10%, althoughconceding that a reaction of real consequence was required giventhe extraordinary trajectory of the market from 3/09 - 4/10.

I expect a sharp recovery rally to get underway over the next 5-7trading days. But I do see a period of uncertainty ahead for a coupleof months until we see how well the leading economic indicatorsprogress.

Monday, May 24, 2010

The confirmed short term downtrend is obvious enough. the marketis substantially oversold and is at levels to support a rally. But, oneright an oversold market has, is to get itself more oversold. I do notshort significant oversolds, so my penchant now for a trade is to lookfor a bounce / recovery, and at a minimum the preference is to firstsee some stabilization in the short term price oscillators as thisdevelopment would signify a loss in negative price momentum.

The market did not make a classic serious top. The bad news is thatwe have an uncharacteristically deep short term oversold for acyclical bull market. and that means you have to be more cautiouson the long side with perhaps a gradual fill when you get the shortterm set-up you prefer.

When I look at my NYSE buying pressure vs. selling pressuremeasures, the market is moderately oversold at -50 and deeplyand very reliably oversold at below -100. We are currently atad below -50, so this measure is still risky. My cycle worksuggests a 13 - 15 week bottoming pattern is just now upon us.So, there could be a sharp price recovery in place by the end ofnext week.

I try to keep technical and fundamental analysis separate on thepremise that when two widely different disciplines tell you the samething, your chances of being correct are better than when you relyon just one discipline. But, sometimes using both techniques inone analysis can be handy, and I plan to do that a little later thisweek.

Friday, May 21, 2010

Gauges which signal future inflation rebounded dramatically overroughly the past year or so. However, the rebound in the pressuregauges merely signaled from deflation to mild inflation. Moreover,as a result of recent weakness in commodities prices, inflationthrust has fizzled in the short run. (CRB commodities chart)

Commodities were set to be the inflation driver this year as theywere in 2009. Last year, commodities rose rapidly on a strongglobal economic turnaround off very depressed levels, but thatprice uptrend was broken earlier this year as traders figuredthat inventory pipeline refilling would be complete by mid - 2010.There has been extra downward pressure on the CRB recently asChina -- a major buyer of raw materials -- has been signaling itdesires to avoid overheating -- and as traders handicap apresumed slowdown in Europe's recovery in the wake of therecent uproar over debt addled EU members such as Greeceand Spain.

Now, note that the CRB is moving toward an oversold situation inthe short run, and note too, that commodities can be volatile.Thus, one cannot vouchsafe a flattish CPI for more than a coupleof months.

My longer range inflation thrust measure, which keys off the UScapacity utilization rate and the leading economic indicators, iscurrently very tame for 2010, but suggests a sharp accelerationof inflation pressure in 2011 as operating rates rise significantlyfurther and cost pressures build broadly. These currently stilllow broader measures of economic activity have indeed partiallyoffset the impact for the inflation picture from commodities overthe past year, but that could all change in 2011 as economicrecovery progresses.

Thursday, May 20, 2010

Core fundamentals -- interest rates, liquidity, confidence measuresremain positive and support continuation of an "easy money"cyclical bull market.There has been some slippage in the indicators.This is entirely normal and I note that the erosion is from nearlyunprecedentedly strong levels.

Corp. earnings remain in a strong uptrend and continue to acceleraterelative to the long run trend. Importantly, profits, though rising,remain well below levels that would signal a cyclical peak andfundamental trouble for the market.

My SP500 Market Tracker, which started to bottom a year or soago with a value of 655, has jumped to the 1190 level on a dramaticrecovery of earning power. For most of the cyclical bull run since3/09, the SP 500 actual has traded at a substantial premium to theTracker value. With the recent sell-off, however, the market iscurrently running at a 9.6% discount. So, the market is nowattractive relative to fair value as the Tracker has caught up withand surpassed the index. Estimated Tracker value based on fullyear 2010 expected earnings is just shy of 1350 and I do not havean issue with that number at this time.

Now for a couple of secondary indicators. The sharp run-up in thereal price of oil off its 2009 low did not appear to have damaged themarket. Moreover, the oil price has recently sold off sharply alongwith the stock market. Thus, the oil price indicator has not beenuseful so far. The other secondary indicator concerns financialliquidity and this requires some discussion.

The large liquidity tailwinds the stock market enjoyed over 2009have ended. For example, combined retail and institutional moneymarket funds aggregated a record $3.50 tril. in 3/o9. By the end ofApril, 2010 the combined mm fund total stood at $2.66 tril., or 24%below the '09 record. In turn, the $2.66 tril. of 4/10 compares withthe $2.9 tril. on hand in mm funds at y/e 2007. In short, the largebuild up of cash that occurred over the recession and the deep bearmarket has been more than fully drawn down. Also note that totalsystem financial liquidity has been shrinking mildly while realeconomic output has been rising. Thus, the liquidity tailwindshave reversed course viv a vis the stock market, and are nowheadwinds. This is a short term issue for the stock market, butyou have to be careful not to draw dire conclusions yet, sinceeconomic recovery will prompt mm fund growth and, eventually,private sector credit growth, which will expand the base of liquidityavailable to the capital markets. However, suffice it to say that sincethe Sp 500 is dramatically above the 2009 cyclical low, plenty of thebucks available have been put into play.

Wednesday, May 19, 2010

One of my concerns about the stock market over recent monthshas been the potential for a collective emotional backslide thatcould be triggered by events that remind investors of the originaltrauma of the economic / financial crisis of 2007 - early 2009.I think it is crazy to expect that investors would skate right out ofthat nightmare without experiencing subsequent shivers orwithout looking back. The problems the EU is encountering andsome mild policy tightening by China have been the catalysts tohave ignited fears.

And, of course, from the 3/09 low into 4/10, the SP 500 advancedby a staggering 80+%. That advance included the funky, out-of-place rally of the early spring. What better time for a bunch oftraders to finally take profits?

I do not want to minimize the various problems the EU is facingnow nor do I wish to wave off China's mild tilt toward temperance.But these are issues that are being encountered in a global economicrecovery with unprecedented monetary and fiscal support. I willkeep an eye on these problems, but as of now, I think the risksthey pose are rather mild.

I am leaning more to the diagnosis of post traumatic stress jitterscoupled with good old fashioned profit taking and portfoliorestructuring to account for the recent flight from risk taking. Yet,you have to be respectful of these factors as a re-stoking of the oldfears and the profit motive are all too human.

Friday, May 14, 2010

Greybeard traders know that oil often experiences moderateseasonal price weakness running from late April into June / July.The big seasonal build of petrol stocks completes in the springand demand eases off. Gasoline production is up about 5% thisyear in the US, providing extra stock for the upcoming primedriving season. But Jun. '10 oil has plunged from near $88 bl. inApril to close near $71.50 today. Down 18.5%, this is not yourmild seasonal dip.

Traders have concerns beyond goodly refined product supply. Theyhave taken note that China -- a huge crude buyer -- is inching alongtoward a tighter monetary policy. they see that to preserve the EUas it stands, southern and far eastern Europe are under pressurefrom the markets to reduce budget deficits. And, they are taking intoaccount continuing Euro weakness and US dollar strength as themarkets adjust for a more sluggish and fractious EU vs. the US.

The crack in the oil market has penalized sector investors, but itwill also work to reduce cyclical inflation pressure and enhance thereal wage in the US which are plus factors for the economy.

The weakness in the oil price has broken its uptrend off the early2009 cyclical low and it has brought oil down to an importantsupport level. The price drop is leading to development of a sharpshort term oversold condition, which might well give players alongside shot at moderate seasonal price strength starting late inthe summer.

Right now the psychology for oil is not good what with therealizations that Europe may grow more slowly and that China isnow snugging up on policy. We have to wait a bit on the EU, but Idoubt China is prepared to slam the door on growth. Given thegrand power of the central gov., China can play stop / go withmonetary policy far more freely than can governments in theWest.

If you are like me, and drive and heat your home with oil, anopportunity to hedge your cost with a long position in an oversoldoil market is worth keeping an eye on. Oil price chart.

Wednesday, May 12, 2010

The normal admonition is to say beware of spike bottoms, aslong term history shows they hold up no more than 50% of thetime in bull markets. Yet, this cyclical advance has relished spikebottoms, so traders need to have that fact in mind.

The sharp decline in the market last week wiped out the over-boughts across the time spectrum and left the market deeplyoversold on a short term basis. The deep sell-off ended abruptlybut started gradually enough to provide trade worthy shortswhich should have been covered on Friday.

As we moved into this week, I found I no longer had a firm technicalcase for urging caution as much of the excess was wrung out insudden fashion.

This week the market has rallied sharply from a deep short termoversold up to neutral. The market is in a confirmed short termdowntrend, but has been strong enough this week to make itreasonable to expect a test of the short term downtrend line, whichif breached on the upside, would be a preliminary signal that apositive reversal might be in order.

I did have a short position coming into last week's decline. Thatposition was closed on 5/7. I have not jumped into the marketon the long side and will probably look to see whether there is aconfirmed positive short term reversal before coming off thesidelines.

I have to warn that I am now charting off closing prices asI am unclear as to how much of the tape on Thursday, May 6 willturn out to involve broken and hence phantom trades. Chart.

Monday, May 10, 2010

Leading IndicatorsAs discussed previously, global leading economic indicators didflatten out over the 9/09 - 2/10 period following rapid recoveryearlier last year. This was true of the eurozone and no doubt addedto creditor concerns regarding the weaker links such as Greece. Thegood news is that there has been substantial improvement in morerecent months both in the eurozone and around the globe.

US weekly leading indicators have regained positive momentumafter a Jan. - Feb. '10 dip. US monthly leaders also remain strong.The improvement in the breadth of new orders has been steadyenough, and although high, remains below record levels. The $ trendof new orders has also accelerated sharply off the low early 2009base.

Yr/yr % momentum of the leading indicators may be peaking now,but momentum has been unusually strong and signals good growthin output and profits through Aug. '10.

My Economic Power Index is now showing recovery again. Theyr/yr change in the real wage has flattened out but is holding upbetter than earlier expected, and the yr/yr change in employment,although still negative is improving rapidly. The index looks set tobreak out of a broad three year downtrend in the months ahead.At this juncture the continuing expansion in jobs held is necessaryto sustain consumer confidence and spending. Internet job listingshave jumped in recent months and have reversed a steep downtrendin place since late 2007.

The Business Strength Index has recovered enough to signalthat the Fed should raise short rates. However, the capacityutilization component is still low by the Fed's reckoning, and therehas also yet to be a decisive turn in short term business creditdemand (The re-activation of swap agreements between the Fedand Europe's central banks could also affect US monetary policyin the short run).

There remains large slack in the US economic system and thisnow includes banking system liquidity. Thus, the economicrecovery continues to have the potential to be a lengthy one.

Friday, May 07, 2010

I am away from my home office and am posting this on a remoteterminal, so I will keep it brief. Since last autumn, I have cautionedabout the stock market potential from several different perspectives.

Basically, I have argued for over a year that the advance from 3/09represented not only a cyclical bull market, but a potentially powerfulone if anticipated strong earnings could be delivered smoothly. Evenso, by autumn of 2009, I came to regard the trajectory of the upmove to be too strong. Not reckless, but unsustainable. This caution wasextended when the 2/10 rally broke out to new cyclical highs aftercompletion of a classical cyclical upleg. It marked the untimely arrivalof the "johnny-come-lateleys".

The recent sharp sell off has gone along way toward eliminating theoverheated trajectory of the market and has ended the rally from thelate arrivals. It has brought the market to a more logical place andhas eliminated the overbought condition. Chart.

Wednesday, May 05, 2010

For weeks now, schooled technicians have known the market wasoverbought. A correction or consolidation was thus widelyanticipated. Well, we have a correction which has quickly wipedout the short term overbought and brought the market into amildly oversold condition with the SP 500 at 1166.

A bit more weakness over the next several days would lendconfirmation to the downtrend in place as the 10 and 25 day m/a'swould both be down and a longer term trendline pegged off the3/09 and 2/10 lows would likely be broken.

So there is trendline support around 1160 on the SP 500 and thereis obvious support at 1150. A more attractive and deeper oversoldwould develop down in the 1125 - 1135 range.

The abatement of selling pressure today lends hope to the idea themarket could stabilize for a spell in the days ahead, but that is ahope only.

From a trading perspective, I would prefer to see further weaknessdown to the 1125 - 1135 range before dropping the shortingmentality and looking long again.

Sunday, May 02, 2010

Once leverage or borrowing gets into the game, the borrower needsto generate the cash flow to service the debt and to generatesufficient income to manage expenses and have enough left over toget the return on equity boost leverage can bring. Credits getshaky as debt service outlays begin to consume large portions ofcash flow. Credit quality erodes even faster when cash flow isunstable and its visibility is called into question. Tossing aboutleverage ratios without regard to how well debt is being servicedand without a careful analysis of a borrower's income and cashflows is an idle game.

Which brings us to the European Union where debt ratios are highand where income / cash flow are now under pressure at the statelevel. The economic recovery is but inching forward in the eurozone.The revenue take of sovereigns is under pressure, and statespending has been pushed higher to fund recession countermeasuressuch as unemployment insurance. The problem is now beingcompounded by sharply rising funding costs for Greece, Spain et alas investors worry about debt service capability in the presentbut down the road as well if greater austerity drags incomes furtherdown as a result of restructuring programs.